1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8607
BELLSOUTH CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1533433
(State of Incorporation) (I.R.S. Employer
1155 Peachtree Street, N. E., Identification Number)
Atlanta, Georgia 30309-3610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 404 249-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
At October 31, 1999, 1,882,319,274 common shares were outstanding.
<PAGE>
Table of Contents
Item Page
Part I
1. Financial Statements
Consolidated Statements of Income ....................... 3
Consolidated Balance Sheets ............................. 4
Consolidated Statements of Cash Flows ................... 5
Consolidated Statements of Shareholders' Equity
and Comprehensive Income ............................. 6
Notes to Consolidated Financial Statements .............. 8
2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ...................... 15
3. Qualitative and Quantitative Disclosures about Market Risk .. 28
5. Other Items ................................................. 28
Part II
6. Exhibits and Reports on Form 8-K ............................ 30
This quarterly report on Form 10-Q/A is being filed as a result of the
restatement of our consolidated financial statements for the three and nine
months ended September 30, 1999. To the extent this amended filing is
inconsistent with our original quarterly report on Form 10-Q for the three and
nine months ended September 30, 1999, the original filing is hereby superseded
and amended. To the extent the original filing is unaffected by the restatement,
the original filing has not been updated or corrected to reflect events
occurring subsequent to the date of the original filing.
<PAGE>
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating Revenues:
Wireline communications:
Local service ................... $2,747 $2,542 $8,113 $7,458
Network access .................. 1,200 1,147 3,578 3,458
Long distance ................... 158 180 461 532
Other wireline .................. 310 267 845 752
Total wireline communications . 4,415 4,136 12,997 12,200
Domestic wireless .................. 815 702 2,355 2,018
International operations ........... 575 514 1,701 1,450
Advertising and publishing ......... 540 481 1,290 1,211
Other .............................. 77 32 200 76
Total Operating Revenues......... 6,422 5,865 18,543 16,955
Operating Expenses:
Operational and support expenses ... 3,541 3,291 10,153 9,376
Depreciation and amortization ...... 1,207 1,111 3,475 3,228
Provision for asset impairment ..... -- -- 320 --
Total Operating Expenses ......... 4,748 4,402 13,948 12,604
Operating Income ...................... 1,674 1,463 4,595 4,351
Interest Expense ...................... 266 218 737 611
Gain on Sale of Operations ............ 39 -- 55 155
Net Equity in Earnings (Losses) of
Unconsolidated Businesses .......... (26) 42 (235) 89
Other Income, net ..................... 15 31 188 130
Income Before Income Taxes ............ 1,436 1,318 3,866 4,114
Provision for Income Taxes ............ 442 504 1,471 1,590
Net Income ....................... $ 994 $ 814 $2,395 $2,524
Weighted-Average Common Shares
Outstanding:
Basic .............................. 1,885 1,965 1,903 1,975
Diluted ............................ 1,904 1,979 1,921 1,987
Dividends Declared Per Common Share ... $ .19 $ .18 $ .57 $ .54
Earnings Per Share:
Basic .............................. $ .53 $ .41 $ 1.26 $ 1.28
Diluted ............................ $ .52 $ .41 $ 1.25 $ 1.27
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 878 $ 3,003
Temporary cash investments .................. 262 184
Accounts receivable, net of
allowance for uncollectibles of
$293 and $251 ............................. 4,794 4,629
Material and supplies ....................... 468 431
Other current assets ........................ 539 459
Total Current Assets ...................... 6,941 8,706
Investments and Advances ..................... 4,863 2,861
Property, Plant and Equipment ................ 60,205 57,974
Less: accumulated depreciation ............... 36,054 34,034
Property, Plant and Equipment, net ........ 24,151 23,940
Deferred Charges and Other Assets ............ 1,876 1,028
Intangible Assets, net ....................... 3,719 2,875
Total Assets ................................. $41,550 $39,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year ............... $ 7,308 $3,454
Accounts payable ............................ 2,062 2,219
Other current liabilities ................... 4,244 3,477
Total Current Liabilities ................. 13,614 9,150
Long-Term Debt ............................... 8,786 8,715
Noncurrent Liabilities:
Deferred income taxes ....................... 2,513 2,512
Unamortized investment tax credits .......... 136 167
Other noncurrent liabilities ............... 3,036 2,756
Total Noncurrent Liabilities .............. 5,685 5,435
Shareholders' Equity:
Common stock, $1 par value (4,400 shares
authorized; 1,884 and 1,950
shares outstanding) ...................... 2,020 2,020
Paid-in capital ............................. 6,766 6,766
Retained earnings ........................... 10,767 9,479
Accumulated other comprehensive income ...... (1,057) (64)
Shares held in trust and treasury ........... (4,721) (1,752)
Guarantee of ESOP debt....................... (310) (339)
Total Shareholders' Equity ................ 13,465 16,110
Total Liabilities and Shareholders' Equity ... $41,550 $39,410
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ........................................................ $ 2,395 $2,524
Adjustments to net income:
Depreciation and amortization ................................. 3,475 3,228
Provision for asset impairment ................................ 320 --
Provision for uncollectibles ................................. 260 230
Net equity in losses (earnings) of unconsolidated businesses .. 235 (89)
Minority interests in income of subsidiaries .................. 67 27
Deferred income taxes and unamortized investment tax credits .. (92) 39
Gain on sale of operations .................................... (55) (155)
Recognition of foreign investment tax credits ................. (120) --
Dividends received from unconsolidated businesses.............. 59 169
Net change in:
Accounts receivable and other current assets .................. (548) (153)
Accounts payable and other current liabilities ................ 710 195
Deferred charges and other assets ............................. (391) (235)
Other liabilities and deferred credits ........................ 76 74
Other reconciling items, net ...................................... 80 42
Net cash provided by operating activities ..................... 6,471 5,896
Cash Flows from Investing Activities:
Capital expenditures .............................................. (4,456) (3,744)
Investments in and advances to unconsolidated businesses .......... (3,751) (566)
Purchases of licenses and other intangible assets ................. (296) (575)
Proceeds from sale of operations .................................. 215 155
Purchases of short-term investments ............................... (243) (292)
Proceeds from disposition of short-term investments ............... 144 98
Proceeds from repayment of loans and advances...................... 60 57
Other investing activities, net ................................... 73 126
Net cash used for investing activities ........................ (8,254) (4,741)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt .................... 3,451 (127)
Proceeds from long-term debt ...................................... 508 1,454
Repayments of long-term debt ...................................... (205) (753)
Dividends paid .................................................... (1,091) (1,068)
Purchase of treasury shares ....................................... (3,032) (888)
Other financing activities, net ................................... 27 46
Net cash used for financing activities ........................ (342) (1,336)
Net Decrease in Cash and Cash Equivalents .......................... (2,125) (181)
Cash and Cash Equivalents at Beginning of Period ................... 3,003 2,570
Cash and Cash Equivalents at End of Period ......................... $ 878 $ 2,389
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
Number of Shares Amount
- --------------------------------------- -------------------- -----------------------------------------------------------------------
Accum.
Shares Other Shares Guaran-
Held In Compre- Held In tee of
Common Trust and Common Paid-in Retained hensive Trust and ESOP
Stock Treasury Stock Capital Earnings Income Treasury Debt Total
(a) (a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1998 ...................... 2,020 (70) $2,020 $6,766 $9,479 $(64) $(1,752) $(339) $16,110
Net income ...................... 2,395 2,395
Other comprehensive income, net of tax:
Foreign currency
translation adjustments ..... (145) (145)
Net unrealized losses
on securities ............... (848) (848)
Total comprehensive income (b) .. 1,402
Dividends declared .............. (1,079) (1,079)
Share issuances for
employee benefit plans ........ 2 (38) 66 28
Purchase of treasury stock ...... (68) (3,032) (3,032)
Purchase of stock by
grantor trust ................. (3) (3)
ESOP activities and related
tax benefit ................... 10 29 39
------ -------- ------- ------- ------- --------- ---------- -------- ---------
Balance at September 30, 1999 ... 2,020 (136) $2,020 $6,766 $10,767 $(1,057) $(4,721) $(310) $13,465
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of September 30, 1999, there were
approximately 36 shares held in trust and 100 shares held in treasury.
(b) Total comprehensive income for third quarter 1999 was $115.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
Number of Shares Amount
- ---------------------------------------- -------------------- ----------------------------------------------------------------------
Accum.
Shares Other Shares Guaran-
Held In Compre- Held In tee of
Common Trust and Common Paid-in Retained hensive Trust and ESOP
Stock Treasury Stock Capital Earnings Income Treasury Debt Total
(a) (a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1997 ...................... 1,010 (18) $1,010 $7,714 $7,382 $ 36 $(575) $(402) $15,165
Net income ...................... 2,524 2,524
Other comprehensive income, net of tax:
Foreign currency
translation adjustments ..... (38) (38)
Total comprehensive income (b)... 2,486
Dividends declared .............. (1,064) (1,064)
Share issuances for
employee benefit plans ........ 1 (29) 68 39
Acquisition-related
transactions .................. 1 92 33 125
Purchase of treasury stock ...... (14) (888) (888)
Purchase of stock by
grantor trust ................. (1) (34) (34)
ESOP activities and
related tax benefit ........... 6 64 70
------ ----- ------- ------- -------- ------ --------- -------- ---------
Balance at September 30, 1998 ... 1,010 (31) $1,010 $7,777 $8,848 $ (2) $(1,396) $(338) $15,899
</TABLE>
(a) Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of September 30, 1998, there were
approximately 18 shares held in trust and 13 shares held in treasury.
(b) Total comprehensive income for third quarter 1998 was $807.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars In Millions)
Note A - Preparation of Interim Financial Statements
In this report, BellSouth Corporation and its subsidiaries are referred to as
"we" or "BellSouth".
The accompanying unaudited consolidated financial statements have been prepared
based upon Securities and Exchange Commission rules that permit reduced
disclosure for interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of the interim
periods shown. All adjustments are of a normal recurring nature unless otherwise
disclosed. Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of our significant accounting policies and other
information, you should read this report in conjunction with the consolidated
financial statements included in our latest annual report on Form 10-K and
previous quarterly reports on Form 10-Q and 10-Q/A.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - New Accounting Pronouncements
In the first quarter of 1999, we adopted a new accounting standard (SOP 98-1)
related to the capitalization of certain costs for internal-use software
development. Adoption of the new standard caused an increase in earnings as a
result of the capitalization of costs that had previously been expensed. The
impacts on income before income taxes, net income and earnings per share were as
follows:
Third Quarter Year-to-Date
1999 1999
Income before income taxes ........... $ 123 $ 383
Net income ........................... $ 80 $ 240
Earnings per share ................... $ .04 $ .12
The adoption also changed the classification of these expenditures in the
consolidated statements of cash flows from operating to investing activities.
Note C - Earnings Per Share
Prior period amounts related to weighted-average common shares and dividends
declared per common share have been adjusted for the two-for-one stock split
which occurred in December 1998. The following is a reconciliation of the
weighted-average share amounts (in millions) used in calculating earnings per
share:
Third Quarter Year-to-Date
1999 1998 1999 1998
Basic common shares outstanding ........1,885 1,965 1,903 1,975
Incremental shares from stock options .. 19 14 18 12
Diluted common shares outstanding ......1,904 1,979 1,921 1,987
The earnings amounts used for per-share calculations are the same for both the
basic and diluted methods.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note D - Segment Information
We have four reportable operating segments: (1) Wireline communications; (2)
Domestic wireless; (3) International operations; and (4) Advertising and
publishing. We have included the operations of all other businesses falling
below the reporting threshold in the "Other" segment. The "Reconciling items"
shown below include Corporate Headquarters and capital funding activities,
intercompany eliminations and other nonoperating items. The following table
provides information for each operating segment:
<TABLE>
<CAPTION>
Third Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Wireline communications
External revenues .................... $4,415 $4,136 6.7 $12,997 $12,200 6.5
Intersegment revenues ................ 66 59 11.9 233 151 54.3
Total revenues ..................... $4,481 $4,195 6.8 $13,230 $12,351 7.1
Operating income ..................... $1,438 $1,145 25.6 $ 4,241 $ 3,547 19.6
Segment net income ................... $ 817 $ 667 22.5 $ 2,399 $ 1,994 20.3
Domestic wireless
External revenues .................... $ 815 $ 702 16.1 $ 2,355 $ 2,018 16.7
Intersegment revenues ................ 5 1 N/M* 12 5 N/M*
Total revenues ..................... $ 820 $ 703 16.6 $2,367 $ 2,023 17.0
Operating income ..................... $ 71 $ 104 (31.7) $ 260 $ 289 (10.0)
Net equity in earnings (losses) of
unconsolidated businesses.......... $ 36 $ 42 (14.3) $ 108 $ 120 (10.0)
Segment net income ................... $ 55 $ 79 (30.4) $ 186 $ 222 (16.2)
International operations
External revenues .................... $ 575 $ 514 11.9 $1,701 $ 1,450 17.3
Intersegment revenues ................ 1 -- N/M 1 -- N/M
Total revenues ..................... $ 576 $ 514 12.1 $1,702 $ 1,450 17.4
Operating income ..................... $ 31 $ 42 (26.2) $ 152 $ 158 (3.8)
Net equity in earnings (losses) of
unconsolidated businesses.......... $ (3) $ 2 N/M $ 5 $ (33) N/M
Segment net income (loss) ............ $ 9 $ 5 80.0 $ 39 $ (22) N/M
Advertising and publishing
External revenues .................... $ 540 $ 481 12.3 $1,290 $ 1,211 6.5
Intersegment revenues ................ 2 -- N/M 8 -- N/M
Total revenues ..................... $ 542 $ 481 12.7 $1,298 $ 1,211 7.2
Operating income ..................... $ 259 $ 233 11.2 $ 561 $ 527 6.5
Net equity in earnings (losses) of
unconsolidated businesses.......... $ 1 $ -- N/M $ (4) $ -- N/M
Segment net income ................... $ 160 $ 143 11.9 $ 342 $ 331 3.3
</TABLE>
* Not Meaningful
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note D - Segment Information (continued)
<TABLE>
<CAPTION>
Third Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Other
External revenues .................... $ 77 $ 32 140.6 $ 200 $ 76 163.2
Intersegment revenues ................ 102 58 75.9 264 165 60.0
Total revenues ..................... $ 179 $ 90 98.9 $ 464 $ 241 92.5
Operating loss ....................... $ (72) $ (75) 4.0 $(224) $(215) (4.2)
Net equity in earnings (losses) of
unconsolidated businesses.......... $ 3 $ (2) N/M $ 3 $ 2 50.0
Segment net loss ..................... $ (39) $ (50) 22.0 $(155) $(121) (28.1)
Reconciling items
Intersegment revenues ................ $ (176) $ (118) (49.2) $ (518) $ (321) (61.4)
Operating income (loss) .............. $ (53) $ 14 N/M $ (395) $ 45 N/M
Net equity in earnings (losses) of
unconsolidated businesses
(Note G)............................ $ (63) $ -- N/M $ (347) $ -- N/M
Segment net income (loss)............. $ (8) $ (30) N/M $ (416) $ 120 N/M
</TABLE>
Note E - Investment in Qwest
In May 1999, we acquired a 10% equity interest in Qwest Communications
International Inc. through the purchase of 74,000,000 shares of common stock for
a total of $3.5 billion. The investment is accounted for under the cost method
of accounting. The stock purchase agreement included certain restrictions on our
ability to transfer these shares for a two-year period, with provisions for the
early termination of these restrictions under certain circumstances.
As a result of Qwest's proposed merger with US WEST, these transfer restrictions
have terminated. Accordingly, these securities are now classified as
available-for-sale under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that available-for-sale securities be carried at fair value
with changes in market value recorded as a separate component of shareholders'
equity. Unrealized losses at September 30, 1999 were $851 (net of a deferred tax
benefit of $458).
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note F - Marketable Securities
We have investments in marketable securities, primarily common stocks, which are
considered available-for-sale under SFAS 115. These investments have been
included in our balance sheet under the caption Investments and Advances. Under
SFAS 115, available-for-sale securities are required to be carried at their fair
value, with unrealized gains and losses (net of income taxes) recorded in
Accumulated Other Comprehensive Income (Loss) in our statement of changes in
shareholders' equity and comprehensive income. The fair values of our
investments in marketable securities are determined based on market quotations.
The table below shows certain summarized information related to these
investments at September 30, 1999:
Gross Gross
Unrealized Unrealized
Cost gains losses Fair Value
Investment in Qwest ... $3,500 $ -- $1,309 $2,191
Other investments ...... 132 9 -- 141
Total ............. $3,632 $ 9 $1,309 $2,332
Note G - Devaluation of Brazilian Currency
We hold equity interests in two wireless communications operations in Brazil.
During January 1999, the government of Brazil allowed its currency to trade
freely against other currencies. As a result, the Brazilian Real experienced a
devaluation against the US Dollar. The devaluation and subsequent fluctuations
in the exchange rate resulted in our Brazilian wireless properties recording net
currency losses related to their net US Dollar-denominated liabilities. Our
share of the foreign currency losses was $75 for the third quarter and $355
year-to-date.
Note H - Issuance of Debt
In August 1999, we issued $517 of 7 3/8% bonds due August 1, 2039. The net
proceeds of $501 from this issuance were used to refinance a portion of the $2.5
billion in commercial paper borrowings associated with the financing of our
investment in Qwest.
Note I - Sublease of Communications Towers
In June 1999, we signed a definitive agreement with Crown Castle International,
Inc. for the sublease of all unused space on approximately 1,850 of our wireless
communications towers in exchange for $610 to be paid in a combination of cash
and Crown common stock. The transaction will occur in several phases that began
in second quarter 1999 and will continue through the remainder of 1999. We will
retain, outside of the leases, a portion of the towers for use in operating our
wireless network. Under the agreement, Crown will manage, maintain and remarket
the remaining space on the towers. We also entered into a five-year,
build-to-suit agreement with Crown covering up to 500 towers.
In a similar transaction, we signed a definitive agreement with Crown to
sublease through a master sublease agreement all unused space on 773 PCS towers
for which we will receive approximately $200. In addition, we have entered into
an exclusive three-year, build-to-suit agreement.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note J - Gain on Sale of Operations
In August 1999 we sold our 100% ownership interest in Honolulu Cellular for
total proceeds of $194. In April 1999, we sold our 100% interest in a wireless
property located in Dothan, Alabama for total proceeds of $21. The pretax gains
on these sales were $39 ($23 after tax) and $16 ($10 after tax), respectively.
In 1997, we sold our 20% interest in ITT World Directories to ITT Corporation.
The sale agreement contained provisions that called for additional sales
proceeds to be paid to us in the event that ITT subsequently resold ITTWD above
a certain price. As a result of ITT's subsequent sale of ITTWD, we received
additional proceeds that resulted in a pretax gain of $155 ($96 after tax) in
the first quarter of 1998.
.
Note K - Supplemental Cash Flow Information
Year-to-Date
1999 1998
Cash Paid For:
Income taxes ............... $ 1,113 $ 1,285
Interest ................... $ 667 $ 572
Note L - Summary Financial Information for Equity Investees
The following table displays the summary unaudited financial information for our
equity method businesses. These amounts are shown on a 100-percent basis.
Third Quarter % Year-to-Date %
1999 1998 Change 1999 1998 Change
Revenues .......... $1,386 $1,042 33.0 $3,826 $2,589 47.8
Operating income ... $ 146 $ 85 71.8 $ 308 $ 118 161.0
Net loss ........... $ (143) $ (18) N/M $ (760) $ (3) N/M
Note M - Contingencies
Following the enactment of the Telecommunications Act of 1996, our telephone
company subsidiary, BellSouth Telecommunications, Inc. (BST), entered into
interconnection agreements with various competitive local exchange carriers
(CLECs). These agreements provide for, among other things, the payment of
reciprocal compensation for local calls initiated by the customers of one
carrier that are completed on the network of the other carrier. Numerous CLECs
have claimed entitlement from BST for compensation associated with dial-up calls
originating on BST's network and connecting with Internet service providers
(ISPs) served by the CLECs' networks. It is our position that dial-up calls to
ISPs are not local calls for which terminating compensation is due under the
interconnection agreements.
In February 1999, the FCC issued a decision that such ISP traffic does not
terminate at the ISP and, therefore, is interstate in nature, rather than local.
The FCC stated, however, that it would not interfere with prior state
commissions' decisions regarding this matter. The courts and state regulatory
commissions in BST's operating territory that have considered the matter,
however, have generally ruled that such calls invoke the reciprocal compensation
obligation. We continue to believe that we have a good legal basis for our
position. At September 30, 1999, our exposure related to these disputed claims
was approximately $210, including accrued interest.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Other reciprocal compensation issues
In a related matter, at least one CLEC is claiming terminating compensation of
approximately $140 for service arrangements that we do not believe involves
traffic under BST's interconnection agreement. BST has filed a complaint with
the state regulatory commission asking that agency to declare that BST does not
owe reciprocal compensation for these arrangements. The CLEC has filed a
complaint with the state regulatory commission asking it to order BST to pay the
disputed amounts. Hearings on this matter were held in August 1999 and a
decision is pending. We believe that we have a good legal basis for our position
and, accordingly, no provision has been recorded for this claim in these
financial statements.
Note N - South Carolina Regulatory Matters
Beginning in 1996, BST operated under a price regulation plan approved by the
South Carolina Public Service Commission under existing state laws. In April
1999, however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, BST elected to be regulated under a new state
statute, adopted subsequent to the Commission's approval of the earlier plan.
The new statute allows telephone companies in South Carolina to operate under
price regulation without obtaining approval from the Commission. The election
became effective during August 1999.
The South Carolina Consumer Advocate petitioned the Commission seeking review of
the level of BST's earnings during the 1996-1998 period when it operated under
the subsequently invalidated price regulation plan. The Commission granted BST's
motion to dismiss the petition on November 4, 1999.
Note O - Foreign Investment Tax Credits
The reduction in our effective tax rate during third quarter 1999 was primarily
driven by the recognition of investment tax credits by one of our foreign
subsidiaries. The credits were claimed by the subsidiary but were denied by the
national taxing authority. A tax contingency reserve was established at that
time while the matter was under appeal. In September 1999, we received a
favorable ruling on our appeal leading to the recognition of the benefit.
Note P - Restatement of Second and Third Quarter 1999 Results
We have restated our consolidated financial statements for second and third
quarter 1999 to revise the accounting treatment for a previously reported asset
swap transaction. In June 1999, we executed a contract with Ericsson to replace
infrastructure equipment, including switches, base stations and software, in 14
wireless markets. We entered into the agreement to improve network performance
and to lay the foundation for migration of the network to Third Generation
wireless (3G) and wireless Internet. We expect the conversion to be completed
over a 12-month period beginning in December 1999.
We previously determined the accounting treatment for the transaction did not
result in an impairment of the assets. Upon review of clarifying accounting
guidance and further analysis, we revised the reporting of the transaction. As a
result, a non-cash charge of $320 ($187 after tax) was recorded in the second
quarter of 1999 to write these assets down to their estimated fair market value
of approximately $320.
We will continue to use the existing infrastructure equipment until the
conversion process has been completed and accelerate the recognition of
depreciation expense on these assets over their shortened remaining service
life. As a result, additional depreciation expense of $37 ($21 after tax) was
recorded for the third quarter and $49 ($28 after tax) for the year-to-date
period.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
The significant effects of the restatement are as follows:
<TABLE>
<CAPTION>
------------------------------------ -----------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, 1999 September 30, 1999
------------------------------------ -----------------------------------
As previously As previously
reported As restated reported As restated
<S> <C> <C> <C> <C>
Depreciation and amortization ... $1,170 $1,207 $ 3,426 $ 3,475
Total operating expenses......... $4,711 $4,748 $13,579 $13,948
Operating income................. $1,711 $1,674 $ 4,964 $ 4,595
Income before income taxes....... $1,470 $1,436 $ 4,217 $ 3,866
Provision for income taxes....... $ 455 $ 442 $ 1,607 $ 1,471
Net income....................... $1,015 $ 994 $ 2,610 $ 2,395
Earnings per share:
Basic......................... $ .54 $ .53 $1.37 $1.26
Diluted....................... $ .53 $ .52 $1.36 $1.25
Total assets..................... $41,919 $41,550
Total shareholders' equity....... $13,680 $13,465
</TABLE>
<PAGE>
BELLSOUTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(Dollars in Millions, Except Per Share Amounts)
For a more complete understanding of our industry, the drivers of our business,
and our current period results, you should read the following Management's
Discussion and Analysis of Results of Operations and Financial Condition (MD&A)
in conjunction with the MD&A in our latest annual report on Form 10-K and
previous quarterly reports on Form 10-Q and 10-Q/A.
- -------------------------------------------------------------------------------
Consolidated Results of Operations
- -------------------------------------------------------------------------------
Key financial and operating data for third quarter 1999 and 1998, and the
respective year-to-date periods are as follows:
<TABLE>
<CAPTION>
----------------------- ------------ -- ------------------------- ----------
Third Quarter % Year-to-Date %
----------------------- ----------- -------------
1999 1998 Change 1999 1998 Change
----------- ----------- ------------ -- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $6,422 $5,865 9.5 $18,543 $ 16,955 9.4
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ------------- ----------
Expenses $4,748 $4,402 7.9 $13,948 $ 12,604 10.7
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ------------- ----------
EBITDA (a) $2,881 $2,574 11.9 $8,390 $7,579 10.4
- ------------------------------------------------- ----------- ----------- ------------
EBITDA margin 44.9% 43.9% +100bps 45.2% 44.7% +50bps
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ------------- ----------
Access line counts (000's):
Switched access lines 24,440 23,869 2.4
Access line equivalents(b) 18,349 13,470 36.2
Total equivalent access lines 42,789 37,339 14.6
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ------------- ----------
Digital and data services revenues $698 $ 534 30.7 $2,004 $ 1,493 34.2
- ------------------------------------------------- ----------- ----------- ------------ -- ----------- ------------- ----------
Convenience feature revenues $481 $ 428 12.4 $1,381 $ 1,175 17.5
- ------------------------------------------------- ----------- ----------- ------------
Access minutes of use (millions) 27,858 26,438 5.4 82,310 77,760 5.9
- ----------------------------------------------------- ------- ----------- ------------ -- ----------- ------------- ----------
Proportionate wireless customers (000's):
- ------------------------------------------------- ----------- ----------- ------------
Domestic(c) 5,135 4,423 16.1
International(d) 5,163 2,933 76.0
- ------------------------------------------------- ----------- ----------- ------------
</TABLE>
(a) EBITDA represents income before net interest expense, income taxes,
provision for asset impairment, depreciation and amortization, net equity
in earnings (losses) of unconsolidated businesses and other income, net. We
present EBITDA because it is a widely accepted financial indicator used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance and because we believe that EBITDA is an
additional meaningful measure of performance and liquidity. EBITDA does not
represent cash flows for the period, nor is it an alternative to operating
income (loss) as an indicator of operating performance. You should not
consider it in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. The
items excluded from the calculation of EBITDA are significant components in
understanding and assessing our financial performance. Our computation of
EBITDA may not be comparable to the computation of similarly titled
measures of other companies. EBITDA does not represent funds available for
discretionary uses.
(b) Represents the approximate number of switched access lines that would be
functionally equal to non-switched, high-capacity digital and data circuits
in service.
(c) During fourth quarter 1998, we reorganized our Los Angeles and
Houston/Galveston cellular partnerships with AT&T. During the third quarter
of 1999, we sold our Honolulu Cellular operations. We have restated 1998
domestic wireless customers to reflect these changes and provide more
meaningful comparative information for existing operations.
(d) During fourth quarter 1998, we sold our interest in BellSouth New Zealand.
We have restated 1998 international wireless customers to exclude the
customers of BellSouth New Zealand and provide more meaningful comparative
information for existing operations.
<PAGE>
- -------------------------------------------------------------------------------
Overview
- -------------------------------------------------------------------------------
Net income and earnings per share for third quarter and year-to-date 1999 and
1998 are as follows (all references to earnings per share are on a diluted
basis):
<TABLE>
<CAPTION>
----------------------- ----------- --- ----------------------- ------------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As Reported:
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Net income $994 $ 814 22.1 $ 2,395 $ 2,524 (5.1)
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Earnings per share $ .52 $ .41 26.8 $ 1.25 $ 1.27 (1.6)
- ------------------------------------------------- ----------- ----------- ---------- --- ----------- ----------- ------------
Normalized:
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Net income $951 $ 814 16.8 $ 2,819 $ 2,428 16.1
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Earnings per share $ .50 $ .41 22.0 $ 1.47 $ 1.22 20.5
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
On a quarter-over-quarter and year-to-date comparative basis, results reflect
strong revenue growth in the core wireline business driven by digital and data
services revenues and significant increases in our international and domestic
wireless customer bases. Expense growth was driven by increased spending in the
core wireline business for customer service and network support functions,
volume-driven increases at our international and domestic wireless businesses
and expenses for development and promotion of new business initiatives,
including high-speed data and Internet service offerings.
Normalized results for the 1999 periods exclude the impacts of:
o A write-down of network equipment in our domestic wireless operations that
decreased net income in the year-to-date period by $187 or $.10 per share.
See Note P to the consolidated financial statements for further
information;
o The devaluation of the Brazilian Real. Our share of the foreign currency
losses in our Brazilian wireless properties reduced net income by $75
($0.04 per share) and $355 ($0.18 per share), respectively, during the
quarterly and year-to-date periods (these losses are included in Net Equity
in Earnings (Losses) of Unconsolidated Businesses);
o The recognition of certain foreign investment tax credits generated in
prior years, which increased net income by $95 ($0.05 per share); and
o The gain on sale of our 100% ownership interest in Honolulu Cellular, which
increased net income by $23 ($0.01 per share).
Net income for the 1998 year-to-date period is normalized for the first quarter
1998 gain related to the sale of our investment in ITT World Directories of $96
($0.05 per share).
On January 1, 1999, we adopted a new accounting standard on capitalization of
internal-use software. The period-over-period impact of capitalizing software
costs under the new standard was a benefit of $80 ($0.04 per share) for third
quarter 1999 and a benefit of $240 ($0.12 per share) for year-to-date 1999.
- -------------------------------------------------------------------------------
Results by Segment
- -------------------------------------------------------------------------------
Our reportable segments reflect strategic business units that offer similar
products and services and/or serve similar customers. We have four reportable
operating segments: (1) Wireline communications; (2) Domestic wireless; (3)
International operations; and (4) Advertising and publishing. We have included
the operations of all other businesses falling below the reporting threshold in
the "Other" segment. We evaluate the performance of each business unit based on
net income, exclusive of charges for use of intellectual property rights and
adjustments for special items that may arise. Intersegment revenues and expenses
are not eliminated. Special items are transactions or events that are included
in reported consolidated results but are excluded from segment results due to
their nonrecurring or nonoperational nature.
<PAGE>
The results of businesses in which we own noncontrolling interests are not
included in our reported revenues and expenses but are included in the Net
Equity in Earnings (Losses) of Unconsolidated Businesses line item.
- -------------------------------------------------------------------------------
Wireline Communications
- -------------------------------------------------------------------------------
Wireline communications includes local exchange, network access and intraLATA
long distance services to business and residential customers in a nine-state
region located in the southeastern US.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Local service $2,747 $2,542 8.1 $8,113 $7,458 8.8
Network access 1,200 1,147 4.6 3,578 3,458 3.5
Long distance 158 180 (12.2) 461 532 (13.3)
Other wireline 310 267 16.1 845 752 12.4
Intersegment revenues 66 59 11.9 233 151 54.3
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Total operating revenues $4,481 $4,195 6.8 $13,230 $12,351 7.1
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating expenses $3,043 $3,050 (0.2) $ 8,989 $ 8,804 2.1
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating income $1,438 $1,145 25.6 $ 4,241 $ 3,547 19.6
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Segment net income $ 817 $ 667 22.5 $ 2,399 $ 1,994 20.3
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA $2,306 $1,992 15.8 $ 6,792 $ 6,056 12.2
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA margin 51.5% 47.5% +400bps 51.3% 49.0% +230bps
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
Operating Revenues
Local service
The $205 and $655 increases in local service revenues for the 1999
quarter-to-date and year-to-date periods, respectively, are attributable to
growth in switched access lines and strong demand for digital and data services
and convenience features.
We ended the third quarter with over 42 million total equivalent access lines,
an increase of 14.6% since September 30, 1998. Residential access lines rose
3.4% to 16,889,000, driven by economic growth in our nine-state region as well
as demand for secondary residence lines for home office purposes, Internet
access and children's phones. We added 329,000 secondary residence lines since
September 30, 1998, extending the total to almost 2.5 million lines and
increasing the penetration rate to 17.3%. Business access lines, including both
switched access lines and data circuits, grew 23.6% propelled by expanding
demand for our digital and data services. Switched business access line growth
was flat reflecting continued migration of new and existing business customers
to high-capacity data lines.
Revenues from optional convenience features such as custom calling features
(e.g., Caller ID, Call Waiting, Call Return) and MemoryCall(R) service increased
$53 (12.4%) quarter-over-quarter and $206 (17.5%) on a year-to-date comparative
basis. We continued to drive growth of convenience feature usage through our
Complete Choice(R) package, a one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $48 compared to third quarter 1998 and $139
compared to the first nine months of 1998. Also contributing to the increase in
revenues for the quarter and year-to-date periods were net rate impacts of $54
and $115, respectively. The rate impacts were primarily attributable to sharing
accruals recorded in the prior periods. The growth in local service revenues for
the 1999 periods was partially offset by declines in revenues from our public
payphone subsidiary.
<PAGE>
Network access
Network access revenues grew $53 in third quarter and $120 for the first nine
months of 1999 when compared to the same 1998 periods, due largely to higher
demand. Access minutes of use rose 5.4% to 27,858 million in third quarter 1999
from 26,438 million in third quarter 1998. For the year-to-date period, access
minutes of use grew 5.9% from 77,760 in 1998 to 82,310 in 1999. Increases in
switched access lines and promotional activities by long distance carriers
continue to be the primary drivers of the increase in minutes of use. The
February 1999 introduction of 1+ dialing parity for intraLATA long distance
calls in all states in our wireline territory is also contributing to growth in
minutes.
The growth rate in total minutes of use continues to be negatively impacted by
the trend of business customers migrating from traditional switched circuits to
higher capacity dedicated circuits which are fixed-charge based rather than
per-minute-of-use based. Revenues from these dedicated circuit services grew
approximately $35 quarter-over-quarter and $107 year-to-date on a comparative
basis as Internet service providers and high-capacity users increased their use
of our network. The growth rate in switched minutes of use has also been
negatively impacted by competition from CLECs whose traffic completely bypasses
our network.
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $40 compared to third quarter 1998 and by $103 compared to the first
nine months of 1998. Rate reductions related to the FCC's productivity factor
adjustment and access reforms were partially offset by recoveries of local
number portability costs in both 1999 periods.
Long distance
The decrease for both the quarter and year-to-date periods compared to the same
1998 periods is primarily attributable to a decrease in long distance message
volumes (19.6% for the quarter and 16.0% for the year-to-date periods). The
decrease in the year-to-date period also includes the impact of a regulatory
ruling related to compensation we receive from long distance carriers for
interconnection to our public payphones. Partially offsetting these decreases
were increased revenues from the provision of digital and data services during
both 1999 periods and independent company settlements occurring in first quarter
1999.
Competition from alternative intraLATA long distance carriers and increased
penetration of extended local area calling plans continue to have an adverse
impact on our long distance message volumes. Effective February 1999, we
implemented 1+ dialing parity for all states in our region, which allows
customers to choose a competing intraLATA long distance carrier without having
to dial a special access code. We believe that competition in the intraLATA long
distance market will continue to adversely impact long distance message volumes
and revenues.
Other wireline
The increase in external revenues is attributable to higher revenues in the 1999
third quarter and year-to-date periods from sales of customer premises
equipment, resale of paging products and services, sales of unbundled network
elements, revenues from our Internet access offering and interconnection
revenues from wireless carriers. At September 30, 1999 we had 626,000
subscribers to our BellSouth.net (sm) service, an increase of 107% compared to
the same 1998 period. The increase in intersegment revenues in the 1999 periods
primarily represents increased business activity with our communications group
companies.
Operating Expenses
Operational and support expenses
Operational and support expenses decreased $28 (1.3)% for third quarter 1999 and
increased $143 (2.3%) for the first nine months of 1999 when compared to the
same periods in 1998. Adjusted for the impact of adopting the new rules on
software capitalization, expenses increased $97 (4.4%) quarter-over-quarter and
$506 (8.0%) on a year-to-date comparative basis.
For the quarter, the increase is attributable to increased costs in the
telephone operations associated with higher business volumes, increased spending
related to Year 2000 remediation and growth in reciprocal compensation expense
offset by lower labor-related costs.
For the year-to-date period, the increase was driven by higher labor costs,
primarily in customer service and network support functions, increased spending
related to Year 2000 remediation, growth in reciprocal compensation expense and
other increased costs in the telephone operations associated with higher
business volumes.
<PAGE>
Also contributing to the increases for the quarter and year-to-date periods were
expenses related to new data initiatives, including Asymmetric Digital
Subscriber Line (ADSL) and integrated fiber-in-the-loop (IFITL), and promotional
expenses related to expanding our Internet customer base.
We anticipate making ADSL service available in 30 markets this year, with an
addressable market of approximately 6 million access lines. We are deploying
IFITL in nearly all newly built neighborhoods and also expect to retrofit some
200,000 existing homes in Atlanta and Miami by the end of 1999.
Depreciation and amortization
Depreciation and amortization expense increased $21 (2.5%) for the quarter and
$42 (1.7%) year-to-date. The increase is primarily attributable to amortization
of capitalized internally developed software. While gross depreciable plant
increased by $2,537 (5.1%) since September 30, 1998, the overall composite
depreciation rate was slightly lower, resulting in flat depreciation expense.
- -------------------------------------------------------------------------------
Domestic Wireless
- -------------------------------------------------------------------------------
Domestic wireless is comprised of cellular and personal communications service
(PCS) businesses principally within the southeastern US.
<TABLE>
<CAPTION>
- -------------------------------------------------- ------------------------ ----------- -- ------------------------ -----------
Third Quarter % Year-to-Date %
------------------------ ------------------------
1999 1998 Change 1999 1998 Change
- -------------------------------------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues $ 815 $ 702 16.1 $2,355 $2,018 16.7
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Intersegment revenues 5 1 N/M 12 5 N/M
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Total operating revenues $ 820 $ 703 16.6 $2,367 $2,023 17.0
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Operating expenses $ 749 $ 599 25.0 $2,107 $1,734 21.5
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Operating income $ 71 $ 104 (31.7) $ 260 $289 (10.0)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Net equity in earnings (losses) of
unconsolidated businesses $36 $ 42 (14.3) $108 $120 (10.0)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Segment net income $55 $ 79 (30.4) $186 $222 (16.2)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
EBITDA $ 253 $ 237 6.8 $735 $672 9.4
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
EBITDA margin 30.9% 33.7% -280bps 31.1% 33.2% -210bps
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Customers (a) 4,680 4,191 11.7
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
Average monthly revenue per customer (a) $51 $52 (1.9) $51 $53 (3.8)
- -------------------------------------------------- ----------- ------------ ----------- -- ----------- ------------ -----------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
Revenue growth of $117 for the quarter and $344 year-to-date, compared to the
same 1998 periods, in the consolidated domestic wireless business is
attributable to higher airtime, access, and equipment sales revenues driven by
an 11.7% increase in the customer base. Adjusted for the sale of Honolulu
Cellular in August 1999, the customer growth rate was approximately 15%.
Advertising, enhanced volume pricing strategies (including bundled minutes at
lower rates and prepaid calling plans) and competitive incentive programs (such
as discounted wireless handsets) were key drivers of the customer growth.
Revenue growth is also attributable to the initiation of PCS service in 25 new
markets in the southeastern US over the past twelve months. Average monthly
revenue per customer in third quarter 1999 remained flat reflecting increased
usage offset by declines in per-minute rates. The decline in per-minute rates is
due to the increasingly competitive market environment.
We expect competition to intensify in our markets and continue to pressure
pricing. We believe this will further stimulate demand and continue to increase
usage as the overall market is expanded.
<PAGE>
Operating Expenses
Operational and support expenses
These expenses increased $101 (21.7%) to $567 for the quarter and $281 (20.8%)
to $1,632 for the first nine months of 1999 compared to the same 1998 periods.
These increases resulted from greater customer acquisition costs primarily
associated with higher customer additions in the 1999 periods compared to 1998.
Average acquisition costs per customer, however, have benefited as we shift to
lower cost, direct sales channels. In our continuing effort to migrate our
customer base from analog to digital service, we have moved over 50% of our
subscriber base to digital and have increased digital minutes of use to over 60%
of total network usage. Expenses related to our new PCS markets also contributed
to the increase. During 1999, we initiated service in 25 BTAs in the
southeastern US and will continue our build-out and promotion of these markets
throughout the remainder of 1999.
Depreciation and amortization
Depreciation and amortization increased $49 (36.8%) to $182 during third quarter
1999 and $92 (24.0%) to $475 year-to-date compared to the same 1998 periods. The
increase was primarily attributable to acceleration of depreciation on network
equipment that will be retired and replaced over the next 15 months, as well as
higher levels of property, plant and equipment since September 30, 1998. The
increased investment is the result of the build-out of PCS markets, expansion of
the network related to growth in the customer base and deployment of digital
cellular across all of our consolidated markets.
Net Equity in Earnings (Losses) of Unconsolidated Businesses
Compared to the same 1998 periods, 1999 equity in earnings (losses) of
unconsolidated domestic wireless businesses decreased $6 for the quarter and $12
for the year-to-date periods. These decreases are principally due to lower
earnings at our business in Los Angeles. Earnings were lower due to acquisition
costs associated with higher customer additions and increased amortization
expense that resulted from the reorganization of our ownership interests in
fourth quarter 1998.
- -------------------------------------------------------------------------------
International Operations
- -------------------------------------------------------------------------------
International operations is comprised principally of our investments in cellular
and PCS businesses in nine countries in Latin America as well as in Denmark,
Germany, India and Israel.
<TABLE>
<CAPTION>
- --------------------------------------------------- --------------------- ----------- --- ----------------------- ------------
Third Quarter % Year-to-Date %
--------------------- -----------------------
1999 1998 Change 1999 1998 Change
- --------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues $575 $514 11.9 $1,701 $1,450 17.3
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Intersegment revenues 1 -- N/M 1 -- N/M
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Total operating revenues $576 $514 12.1 $1,702 $1,450 17.4
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Operating expenses $545 $472 15.5 $1,550 $1,292 20.0
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Operating income $31 $42 (26.2) $152 $158 (3.8)
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Net equity in earnings (losses) of
unconsolidated businesses $ (3) $ 2 N/M $5 $(33) N/M
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Segment net income (loss) $ 9 $ 5 80.0 $39 $(22) N/M
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
EBITDA $142 $ 138 2.9 $474 $405 17.0
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
EBITDA margin 24.7% 26.8% -210bps 27.8% 27.9% -10bps
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Customers (a) 3,777 2,370 59.4
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
Average monthly revenue per customer (a) $50 $69 (27.5) $55 $71 (22.5)
- --------------------------------------------------- --------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
<PAGE>
Operating Revenues
Consolidated revenues are from our operations in Venezuela, Argentina, Chile,
Ecuador and Peru and, in the prior year, New Zealand. The increases of $62
quarter-over-quarter and $252 year-to-date on a comparative basis are primarily
due to substantial growth in the customer bases of these operations, which
collectively have grown almost 60% since September 30, 1998. Partially
offsetting the impacts of customer growth is declining monthly revenue per
customer that is driven by continued expansion into lower-usage customer
segments through offerings such as prepaid cellular service as well as
competitive pressures in certain countries. During third quarter, we extended
prepaid cellular products to all nine of the countries we serve in Latin
America. Both the quarter-to-date and year-to-date periods are negatively
impacted by the absence of revenues from BellSouth New Zealand, which was sold
during fourth quarter 1998. Overall weakening of local currencies also impacted
revenue growth on a US Dollar basis.
Operating Expenses
Operational and support expenses For the 1999 periods, these expenses increased
$58 compared to third quarter 1998 and $183 compared to the first nine months of
1998. These increases are primarily the result of operational and customer
acquisition costs associated with growth in customer levels and expanded
operations. Offsetting the increases were prior period expenses incurred by
BellSouth New Zealand.
Depreciation and amortization
Depreciation expense increased $15 quarter-over-quarter and $75 on a
year-to-date comparative basis due primarily to higher gross depreciable plant
resulting from the continued investment in our wireless network infrastructure
and digital conversion of our network in Venezuela. Amortization expense was
relatively flat quarter-over-quarter but has increased $30 on a year-to-date
comparative basis as a result of growth in intangibles related to our purchase
of additional ownership interests in several Latin American operations early
last year.
Net Equity in Earnings (Losses) of Unconsolidated Businesses
Quarter-over-quarter, net equity in earnings (losses) from our unconsolidated
businesses were relatively flat. The improvement in equity in earnings (losses)
from our unconsolidated international businesses in the 1999 year-to-date period
is due to stronger results from our investments in Germany, Panama and
Nicaragua, all of which experienced substantial growth in their customer bases
compared to the same periods in 1998. Offsetting these improvements were
start-up losses related to our operations in Brazil, which were launched in May
1998. Improvements in the current year-to-date period were also offset by less
favorable results from our business in Denmark due to customer acquisition costs
associated with higher customer additions.
Our operations in Brazil continue to be affected by weakness in the local
economy while uncertainty surrounding government proposed economic reforms have
weakened the local currency in recent months. We expect that our earnings will
continue to be affected by foreign currency gains or losses associated with the
US Dollar- denominated debt issued by our Brazilian businesses.
<PAGE>
- -------------------------------------------------------------------------------
Advertising and Publishing
- -------------------------------------------------------------------------------
Our advertising and publishing segment is comprised of companies that publish,
print, sell advertising in and perform related services concerning alphabetical
and classified telephone directories and electronic product offerings.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
External revenues $540 $481 12.3 $1,290 $1,211 6.5
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Intersegment revenues 2 -- N/M 8 -- N/M
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Total operating revenues $542 $481 12.7 $1,298 $1,211 7.2
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating expenses $283 $248 14.1 $737 $684 7.7
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Operating income $259 $233 11.2 $561 $527 6.5
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Net equity in earnings (losses) of
unconsolidated businesses $ 1 $-- N/M $ (4) $ -- N/M
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
Segment net income $160 $143 11.9 $342 $331 3.3
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA $269 $239 12.6 $584 $545 7.2
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
EBITDA margin 49.6% 49.7% -10bps 45.0% 45.0% --
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
Operating Results
External revenues increased $59 for third quarter and $79 for year-to-date 1999
when compared to the same 1998 periods. These increases are principally a result
of revenues from our new international investments in directory publishers in
Peru and Brazil. The growth is also attributable to increased pricing and
volumes, offset by the effects of shifts in directory production schedules.
Adjusted for new businesses and book shifts, external revenues would have
increased by approximately 5.5% for the quarter and 3.6% for the year-to-date
period. To a lesser extent, the increased revenues of our electronic media
offerings also contributed.
Operational and support expenses increased $31 for third quarter and $48 for
year-to-date 1999, when compared to the same 1998 periods, due primarily to our
new international directory publishers' increases in advertising and other
marketing related costs. Depreciation and amortization was flat as there were no
significant increases in property, plant and equipment.
Net equity in earnings (losses) of unconsolidated businesses includes the
results of our new investment in a Brazilian directory publisher.
<PAGE>
- -------------------------------------------------------------------------------
Other
- -------------------------------------------------------------------------------
This segment is primarily comprised of our communications group companies --
including new business initiatives such as entertainment (cable and wireless
television), Internet access, wireless data and interLATA long distance. The
stand-alone revenues and expenses of our Internet access marketing company which
are included in this segment are eliminated in consolidation and reported as
part of the wireline communications results. Also included are businesses whose
primary purpose is to support our other operating segments.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ------------- -- -------------------------- -------------
Third Quarter % Year-to-Date %
----------------------- --------------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
External revenues $77 $32 140.6 $ 200 $ 76 163.2
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
Intersegment revenues 102 58 75.9 264 165 60.0
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
Total operating revenues $179 $90 98.9 $ 464 $ 241 92.5
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
Operating expenses $251 $165 52.1 $ 688 $ 456 50.5
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
Operating loss $(72) $(75) 4.0 $(224) $(215) (3.7)
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
Net equity in earnings (losses) of
unconsolidated businesses $ 3 $(2) N/M $ 3 $ 2 50.0
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
Segment net loss $(39) $(50) 22.0 $(155) $ (121) (28.1)
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
EBITDA $(37) $(47) 21.3 $(125) $(147) 15.0
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
EBITDA margin (20.7%) (52.2%) N/M (26.9%) (61.4%) N/M
- ------------------------------------------------- ----------- ----------- ------------- -- ------------- ------------ -------------
</TABLE>
Operating Results
External revenues were up $45 for third quarter and $124 for year-to-date 1999
when compared to the same 1998 periods. These increases were driven by growth in
revenues from interactive paging services, wireless television offerings and the
resale of interLATA long distance services in markets outside of our wireline
region. Since third quarter 1998, we have rolled out wireless television service
in four new markets and introduced interactive paging service with nationwide
coverage.
Operating expenses reflect increased spending associated with new product and/or
market introductions in all of these businesses. Higher headcount associated
with customer support and installation functions also contributed to the
increase in expenses. Depreciation and amortization has increased reflecting our
continuing investment of resources associated with the growth of these
businesses.
- -------------------------------------------------------------------------------
Other Nonoperating Items
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Provision for Asset Impairment $- $- - $320 $- N/M
Interest Expense 266 218 22.0 737 611 20.6
Gain on Sale of Operations 39 -- -- 55 155 N/M
Net Equity in Earnings (Losses) of
Unconsolidated Businesses (26) 42 N/M (235) 89 N/M
Other Income, net 15 31 N/M 188 130 N/M
Provision for Income Taxes 442 504 (12.3) 1,471 1,590 (7.5)
- ------------------------------------------------- ----------- ----------- ----------- --- ----------- ----------- ------------
</TABLE>
<PAGE>
Provision for asset impairment
This non-cash charge is the result of an asset write-down effective June 1999
related to network equipment in our domestic wireless operations. For more
information, see Note P to the consolidated financial statements.
Interest expense
Higher interest expense in 1999 is attributable to higher average debt balances
in the quarter and year-to-date periods relative to the 1998 periods and a
higher proportion of capitalized interest in the 1998 periods. The higher debt
balances in third quarter 1999 are the result of commercial paper borrowings
associated with the financing of our investment in Qwest. We also capitalized a
greater proportion of our interest in 1998 due to our start-up investments in
Brazil. Our average debt balances were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------------------- ----------- --- ----------------------- ------------
Third Quarter % Year-to-Date %
----------------------- -----------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Average short-term debt balance $ 7,361 $ 2,973 147.6 $ 5,804 $ 3,289 76.5
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Average long-term debt balance $ 8,620 $ 8,743 (1.4) $ 8,531 $ 8,050 6.0
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Total average debt balance $15,981 $11,716 36.4 $14,335 $11,339 26.4
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
During August 1999, we refinanced $501 of commercial paper with the proceeds
from the issuance of 7 3/8% 40-year bonds. We plan to refinance additional
commercial paper when we believe conditions are favorable.
Gain on sale of operations
During third quarter 1999, we recognized a gain of $39 ($23 or $0.01 per share
after tax) from the sale of Honolulu Cellular. During second quarter 1999, we
recognized a gain of $16 ($10 after tax) from the sale of a wireless property in
Alabama. The 1998 year-to-date period includes a gain of $155 ($96 or $0.05 per
share after tax) from our receipt in first quarter 1998 of additional proceeds
related to the 1997 sale of our interest in ITT World Directories.
Net equity in earnings (losses) of unconsolidated businesses
Earnings from our unconsolidated businesses decreased $68 in the third quarter
and $324 in the year-to-date period when compared with the same 1998 periods.
The decreases were driven by foreign exchange losses of $75 and $355,
respectively, related to our Brazilian properties (see Note G to the
consolidated financial statements for further discussion of this matter).
Excluding the impact of these foreign exchange losses, quarter-over-quarter and
year-to-date earnings increased $7 and $31, respectively, when compared to the
same 1998 periods. These results are addressed in the discussions for the
Domestic wireless and International operations segments.
Other income, net
Other income, net includes interest income, gains/losses on disposition of
assets, foreign currency gains/losses and miscellaneous nonoperating income. The
decrease of $16 from third quarter 1998 is attributable to higher minority
interest expense related to our less-than-100-percent owned subsidiaries and
decreased interest income due to lower average cash balances. These decreases
were partially offset by miscellaneous nonoperating items.
For the year-to-date period, the increase of $58 over 1998 is attributable to
increases in other nonoperating items in the 1999 period. Partially offsetting
these increases were higher minority interest expense related to our
less-than-100-percent-owned subsidiaries, decreased interest income due to lower
average cash balances and lower net foreign exchange gains in our consolidated
international businesses.
Provision for income taxes
The provision for income taxes decreased $62 quarter-over-quarter and $119 on a
year-to-date comparative basis. The effective tax rate for third quarter 1999
was 30.8% compared to 38.2% in third quarter 1998. The decrease is due primarily
to the recognition of foreign investment tax credits offset by higher equity
losses from unconsolidated businesses driven by foreign exchange losses recorded
at our Brazilian operations during third quarter 1999. Excluding these items,
our effective rate for third quarter 1999 was 36.8%. The effective rate was
further reduced by a change in the mix of income among taxing jurisdictions.
<PAGE>
For the year-to-date period, the effective tax rate was 38.0% compared to 38.6%
in 1998. The effective tax rate was significantly impacted by higher equity in
losses driven by foreign currency losses recorded at our unconsolidated
Brazilian businesses during the first and third quarters of 1999, as well as the
recognition of foreign investment tax credits in third quarter 1999. Excluding
the effect of these items, our effective rate for the 1999 year-to-date period
was 37.6%. The lower effective rate for the year-to-date period is due to a
change in the mix of income among taxing jurisdictions.
- -------------------------------------------------------------------------------
Financial Condition
- -------------------------------------------------------------------------------
Cash flows from operations are our primary source of funding for capital
requirements of existing operations, debt service, dividends and share
repurchases. We also have ready access to capital markets in the event
additional funding is necessary. While current liabilities exceed current
assets, our sources of funds -- primarily from operations and, to the extent
necessary, from readily available external financing arrangements -- are
sufficient to meet all current obligations on a timely basis. We believe that
these sources of funds will be sufficient to meet the needs of our business for
the foreseeable future.
Net cash provided by (used for):
- ------------------------- ----------- ------------ -----------------------------
1999 1998 Change
----------- ------------ -----------------------------
Operating activities.... $6,471 $5,896 $575 9.8%
Investing activities.... $(8,254) $(4,741) $(3,513) (74.1)%
Financing activities.... $(342) $(1,336) $994 74.4%
- ------------------------- ----------- ------------ -----------------------------
Net cash provided by operating activities
The increase in cash from operations primarily reflects higher EBITDA, partially
offset by an increase in working capital requirements and lower dividends from
our unconsolidated businesses. Operating cash flows for 1999 also include $493
in cash proceeds associated with the closings of our agreements to sublease
wireless communications towers to Crown. Additional closings are scheduled to be
completed throughout the remainder of 1999. These transactions are expected to
generate total cash proceeds in excess of $700.
Net cash used in investing activities
During the first nine months of 1999, we invested $4.5 billion for capital
expenditures to support our wireline and wireless networks, to promote the
introduction of new products and services and increase operating efficiency and
productivity. Significant investments are also being made to support deployment
of ADSL and fast packet switching technologies as well as our IFITL initiative.
Included in these expenditures for the 1999 year-to-date period are
approximately $432 in costs related to the purchase and development of
internal-use software.
During second quarter 1999, our Argentine wireless communications company won
its bid to acquire additional PCS licenses. It will pay approximately $262 for
the licenses and anticipates investing an additional $600 to build out the areas
covered by these licenses.
During April 1999, we announced a new business agreement with Qwest that
included our purchasing a ten percent stake for $3.5 billion. This transaction
closed during May 1999. We initially funded this purchase by utilizing existing
cash reserves and issuing $2.5 billion in commercial paper, $501 of which we
have refinanced with 7 3/8% 40-year bonds.
Net cash used in financing activities
During the first nine months of 1999, we purchased 66 million shares as part of
a $3 billion repurchase plan announced in December 1998. Combined with 1998
repurchases under a previous plan, we have reduced our number of outstanding
shares by 74 million since September 30, 1998. We completed the December 1998
buyback plan during May 1999.
Our debt to total capitalization ratio was 54.4% at September 30, 1999 compared
to 43.0% at December 31, 1998. The increase is a function of increases in
short-term debt attributable to higher net borrowings of commercial paper and
the reduction in shareholders' equity, driven primarily by the effect of our
stock buyback program.
<PAGE>
At November 4, 1999, we had shelf registration statements on file with the SEC
under which $4.7 billion of debt securities could be publicly offered.
Market Risk
For a complete discussion of our market risks, you should refer to the caption
"Market Risk" in our 1998 Annual Report on Form 10-K. Our primary exposure to
market risks relates to unfavorable movements in interest rates and foreign
currency exchange rates. Our exposure to interest rate risk increased during
1999 due to the borrowing of $2.5 billion in commercial paper for our investment
in Qwest. We have refinanced $501 with fixed-rate debt and intend to refinance
additional commercial paper when we believe conditions are favorable. We do not
anticipate any significant changes in our objectives and strategies with respect
to managing such exposures.
- -------------------------------------------------------------------------------
Operating Environment and Trends of the Business
- -------------------------------------------------------------------------------
Regulatory Developments
FCC order on Unbundled Network Elements
In 1996, the FCC issued an order adopting rules governing interconnection and
related matters. In 1999 the U.S. Supreme Court remanded aspects of the rules to
the FCC for further consideration of the requirements in the Telecommunications
Act of 1996; those requirements specify that access to certain network elements
can be required only when necessary or when the failure to provide access would
impair the ability of the requesting carrier to provide services. On remand from
the Supreme Court, the FCC issued an order on November 5, 1999 adopting a
revised list of network elements that incumbent local exchange carriers (ILECs)
such as ourselves must make available to competitors.
The FCC's list, together with its regulations prohibiting ILECs from separating
currently combined elements, means that ILECs will be required to provide
certain combinations of network elements that competitors may substitute for
certain higher priced ILEC services. This substitution may lead to further
increases in competition for certain local exchange access services. The FCC
determined that it would not apply these new rules to allow the substitution of
certain network elements for special access services, and announced that it will
conduct a further inquiry into the use of network element combinations to
provide special access services.
The FCC's revised list does not, however, require ILECs to make network elements
used to provide advanced data services available to competitors, except in very
limited circumstances. This outcome removes a disincentive to ILEC investment in
these rapidly expanding services.
FCC Announcement on Universal Service
On October 21, 1999 the FCC announced a new universal service mechanism for
non-rural carriers serving high-cost areas to ensure that customers in those
areas receive telephone service at affordable rates. We expect to receive
support for service to residents in Alabama, Kentucky and Mississippi. Although
the FCC has not yet issued the formal order and thus the details are not known,
we do not believe the net financial effect of the new arrangement will be
material.
Reciprocal compensation. See Note M to the consolidated financial statements.
South Carolina regulatory matters. See Note N to the consolidated financial
statements.
International Operations
Fluctuations in foreign exchange rates
Our equity investments in international wireless systems are viewed as long-term
assets valued in the local currency, translated into US Dollars, and reported in
our consolidated financial statements. Foreign currency exchange rate
fluctuations may be material to results of operations. A significant weakening
against the US Dollar of the currency of a country where we generate revenues
and earnings may adversely impact our results, such as occurred in Brazil (see
Note G).
<PAGE>
Any weakening of the US Dollar against foreign currencies could have an adverse
impact on cash flows if we are obligated to make significant
foreign-currency-denominated capital investments. Where we consider it to be
economically feasible, we attempt to mitigate the effect of foreign currency
fluctuations through the use of foreign currency hedging contracts.
The impact of a devaluation or depreciating currency on an entity depends on the
residual effect on the local economy and the ability of an entity to raise
prices and/or reduce expenses. Additionally, the economies of most countries in
Latin America have significant economic and trade ties, and therefore an
economic crisis in one country could result in adverse impacts on others. The
likelihood and extent of further devaluation and deteriorating economic
conditions in Brazil or other Latin American countries experiencing similar
conditions and the resulting impacts on our results of operations, financial
position and cash flows is not known.
Euro conversion
In January 1999, certain member countries of the European Union established
permanent, fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro). The Euro will be phased in over a
transition period culminating on January 1, 2002 at which time all existing
currencies will be withdrawn from circulation. We have investments in companies
operating in Germany, Belgium and the Netherlands, which are participating in
the Euro conversion. We do not believe that the Euro conversion will have a
material effect on these investments.
Year 2000 Readiness Disclosure
You should note that the following discussion about the Year 2000 includes
certain forward-looking statements that are subject to risks and
uncertainties. Factors that could cause actual results to differ materially
from those expressed in the forward-looking statements include, but are not
limited to:
o Remaining implementation and testing could reveal the need for
additional unplanned remedial efforts and
o Third-party vendors and suppliers could fail to meet their stated
objectives, timetables or cost estimates.
Inability to reach substantial Year 2000 compliance in our systems and
integral third-party systems could result in interruption of
telecommunications services, interruption or failure of our customer
billing, operating and other information systems and failure of certain
date-sensitive equipment. These failures could result in substantial claims
by customers as well as loss of revenue due to service interruption, delays
in our ability to bill our customers accurately and timely, and increased
expenses associated with litigation, stabilization of operations following
such failures or execution of contingency plans.
During 1997, we initiated a company-wide program to identify and address issues
associated with the ability of our date-sensitive information, telephony and
business systems and certain equipment to properly recognize the Year 2000 as a
result of the century change on January 1, 2000. The program is also designed to
assess the readiness of other entities with which we do business.
Our Year 2000 program is divided into six phases: planning; inventory; impact
analysis; conversion; testing; and implementation. Our progress within these
phases is based on the number of inventoried items that have been addressed and
covers those business processes that we consider "mission critical". Mission
critical applications include those that:
o directly affect delivery of primary services to our customers;
o directly affect our revenue recognition and collection; and
o would create noncompliance with any statutes or laws.
<PAGE>
The three main areas of focus for our Year 2000 program are network components,
information technology systems and building and environmental systems. Each
focus area includes the hardware, software, embedded chips, third-party vendors
and suppliers as well as third-party networks that are associated with the
identified systems.
As of September 1999, we have substantially completed the majority of our Year
2000 conversions, tests and implementations. We have completed all the work on
systems that make up our key business processes, and they have been tested in
our labs in a Year 2000 environment. All of our landline and wireless central
office switches have been remediated, tested and implemented into our production
environment. We have also completed 100% of the upgrades and replacements to the
equipment necessary for E9-1-1 services within our nine-state wireline region.
The applications scheduled to be completed after September 1999 are of low or no
impact to our customers and/or internal business operations and were therefore
specifically targeted for remediation after the more critical applications.
Contingency plans. We have developed numerous continuity plans for conducting
our business operations in the event of crises, including system outages and
natural disasters. We have chartered a Year 2000 Business Contingency Planning
project to ensure that contingency plans are developed and tested and support
infrastructures are in place. This effort is not limited to the risks posed by
the potential Year 2000 failures of our networks, internal information systems
or infrastructures, but also includes the potential secondary impact on us of
Year 2000 failures, including potential systems failures of third parties.
During third quarter 1999, contingency plans were completed and tested.
Costs of project. Some of the costs associated with our Year 2000 compliance
efforts were incurred in 1997 and 1998. We will incur the remainder during 1999
and 2000. At September 30, 1999, we have spent approximately $220 in external
costs towards Year 2000 compliance. We estimate the total external costs of our
compliance efforts will be approximately $265 over the life of the project.
Expected completion. We currently anticipate that the remaining applications
will be Year 2000 compliant in fourth quarter 1999. Unforeseen circumstances
such as those discussed previously could affect our current assessments. As a
result, we are unable to determine the impact that any system interruption would
have on our results of operations, financial position and cash flows.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all derivative
instruments be recognized as assets or liabilities and adjusted to fair value
each period. During June 1999, the FASB postponed the required adoption date
until January 1, 2001. We plan to adopt SFAS No. 133 on January 1, 2001 and are
currently assessing the impact that adoption will have on our results of
operations and financial position.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the caption labeled "Market Risk" in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
Item 5. OTHER ITEMS
We still expect EPS growth from operations in the range of 12%-14% ( excluding
the change in accounting for software, or 19% to 21% if the change is included)
in 1999. These ranges exclude the impact of the write-down of domestic wireless
assets, impact of the currency devaluation in Brazil, and the other normalizing
items in the current year. For 2000, we expect EPS growth from operations in the
13%-15% range (excluding the change in accounting for software).
<PAGE>
- -------------------------------------------------------------------------------
Cautionary Language Concerning Forward-Looking Statements
- -------------------------------------------------------------------------------
In addition to historical information, management's discussion and analysis
contains forward-looking statements regarding events and financial trends that
may affect our future operating results and financial position. These statements
are based on our assumptions and estimates and are subject to risks and
uncertainties. For these statements, we claim the protection of the safe harbor
for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
Factors that could affect future operating results and financial position and
could cause actual results to differ materially from those expressed in the
forward-looking statements are:
o a change in economic conditions in domestic or international markets where
we operate or have material investments which would affect demand for our
services;
o the intensity of competitive activity and its resulting impact on pricing
strategies and new product offerings;
o further delay in our entry into the interLATA long distance market;
o higher than anticipated start-up costs or significant up-front investments
associated with new business initiatives;
o unanticipated higher capital spending from the deployment of new
technologies;
o unsatisfactory results in regulatory actions including access reform,
universal service, terms of interconnection and unbundled network elements
and resale rates; and
o failure to satisfactorily identify and complete Year 2000 software and
hardware revisions by us and third parties.
This list of cautionary statements is not exhaustive. These and other
developments could cause our actual results to differ materially from those
forecast or implied in the forward-looking statements. You are cautioned not to
place undue reliance on these forward-looking statements, which are current only
as of the date of this filing. We have no obligation to publicly release the
results of any revisions to these forward-looking statements to reflect events
or circumstances after the date of this filing.
<PAGE>
- -------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1999.
(b) Reports on Form 8-K:
Date of Event Subject
July 20, 1999 BellSouth 2Q99 Earnings Release
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELLSOUTH CORPORATION
By /s/ W. Patrick Shannon
W. Patrick Shannon
Vice President and Controller
(Principal Accounting Officer)
December 10, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1999.
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share
For the Three Month For the Nine Month
Period Ended Period Ended
September 30, September 30,
1999 1998 1999 1998
Basic Earnings Per Common Share:
Net Income $ 994 $ 814 $ 2,395 $ 2,524
Weighted average shares
Outstanding 1,885 1,965 1,903 1,975
Earnings Per Common Share $ .53 $ .41 $ 1.26 $ 1.28
<PAGE>
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share (continued)
For the Three Month For the Nine Month
Period Ended Period Ended
September 30, September 30,
1999 1998 1999 1998
Diluted Earnings Per Common Share:
Net Income $ 994 $ 814 $ 2,395 $ 2,524
Weighted average shares
Outstanding 1,885 1,965 1,903 1,975
Incremental shares from
Assumed exercise of
stock options and payment of
performance share awards 19 14 18 12
Total Shares 1,904 1,979 1,921 1,987
Earnings Per Common Share $ .52 $ .41 $ 1.25 $ 1.27
EXHIBIT 12
BellSouth Corporation
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Nine Months
Ended September 30,
1999
1. Earnings
(a) Income from continuing operations
before deductions for taxes and interest $ 4,603
(b) Portion of rental expense representative
of interest factor 72
(c) Equity in losses from less-than-50%-owned
investments (accounted for under the
equity method of accounting) 420
(d) Excess of earnings over distributions of
less-than-50%-owned investments
(accounted for under the equity method
of accounting) (56)
TOTAL $ 5,039
2. Fixed Charges
(a) Interest $ 761
(b) Portion of rental expense representative
of interest factor 72
TOTAL $ 833
Ratio (1 divided by 2) 6.05
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 878
<SECURITIES> 262
<RECEIVABLES> 5,087
<ALLOWANCES> 293
<INVENTORY> 468
<CURRENT-ASSETS> 6,941
<PP&E> 60,205
<DEPRECIATION> 36,054
<TOTAL-ASSETS> 41,550
<CURRENT-LIABILITIES> 13,697
<BONDS> 8,786
0
0
<COMMON> 2,020
<OTHER-SE> 11,445
<TOTAL-LIABILITY-AND-EQUITY> 41,550
<SALES> 478
<TOTAL-REVENUES> 18,543
<CGS> 601
<TOTAL-COSTS> 9,219
<OTHER-EXPENSES> 4,729
<LOSS-PROVISION> 260
<INTEREST-EXPENSE> 737
<INCOME-PRETAX> 3,866
<INCOME-TAX> 1,471
<INCOME-CONTINUING> 2,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,395
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.25
</TABLE>
